Shorting Tencent with a long view on Alibaba returns the wily trader 29 per cent, on track for the best annual return in five years
- Investors who short Tencent while taking a long position in Alibaba could have made as much as 29 per cent this year excluding dividends and execution costs
- The pair trade is set for its best annual return in five years, according to Bloomberg analytics
Betting on the gulf in performance between shares of two Chinese internet giants has been a slam-dunk trade this year – and it may have further to run.
The tactic turned more profitable in October, after Hong Kong-listed Tencent slumped to a nine-month low following a series of block trades. On Tuesday the stock slumped as much as 1.6 per cent.
“In the long-term, the trend is probably going to continue,” said Castor Pang, head of research at Core Pacific-Yamaichi International (HK) Ltd. in Hong Kong. “A period of fast mobile-game growth in China seems to be over, and restrictions on mobile games by the government aren’t helping Tencent.”
On the other hand, Alibaba is focused on China’s online consumption, which remains strong, Pang said. Its shares rose 2.5 per cent on Monday.
Tencent has been trying to bounce back from last year’s regulatory clampdown that hit its games business. China is once again approving games, albeit at a slower pace. But Tencent’s losses accelerated last week amid theories that ranged from souring sentiment from mainland investors to concerns that its decision to air National Basketball Association games may backfire.
To be sure, some investors remain bullish on Tencent, which along with Alibaba is due to report quarterly earnings next month. Among the analysts tracked by Bloomberg who cover Tencent, none have a sell rating on the stock.
But with Alibaba seen to benefit from possible measures by Beijing to boost consumption in support of a faltering economy, the trend looks set to continue, said Paul Pong, managing director at Pegasus Fund Managers Ltd.
“Tencent’s growth mainly relies on games and advertisement. But fewer companies will boost marketing expenses when the economy is bad, while the government has tightened game approvals,” he said.
For more insights into China tech, sign up for our tech newsletters, subscribe to our Inside China Tech podcast, and download the comprehensive 2019 China Internet Report. Also roam China Tech City, an award-winning interactive digital map at our sister site Abacus.
